In a 4-1 decision,1 the Supreme Court of Canada
recently held that a statutory exclusion for loss attributable to
"wilful misconduct" of the insured does not require proof
that the insured intended to cause the loss. Rather, the Court held
that it is sufficient if the insured had a "duty to know"
and acted recklessly in the face of that duty, even if the insured
in fact subjectively believed that there was no risk of harm.

In a strong dissenting opinion, however, Wagner J. held that a
finding at trial, that the insured had no intention of causing
harm, was determinative. In Wagner J.'s view, "wilful
misconduct" requires proof of intent, and so the majority
misconstrued the concept of recklessness by finding that it did
not.

While Peracomo focuses on a specific statutory exclusion under
maritime law, this decision nonetheless raises the question of
whether some may argue that it has general application that expands
the scope of intentional acts exclusions found in many other policy
wordings.

It also bears mentioning that the majority did not refer to any
of the oft-cited basic principles of policy interpretation, but
instead chose to rely on cases interpreting the term "wilful
misconduct" in the context of, among other things, the
now-defunct "gratutitous passenger" doctrine. The
majority's reasons for doing so – and its ramifications
with respect to the development of the law in this area –
remain unclear.

The Facts

Réal Vallée is a crab fisherman who had fished on
the St. Lawrence River near Baie-Comeau for about 50 years. He is
the principal of his one-man company, Peracomo Inc., and operates
the fishing boat Réalice.

M. Vallée's story begins in 2005. While fishing for
crab aboard the Réalice, one of his anchors snagged
something on the bottom of the river. It turned out to be a cable.
It was, in fact, a fibre-optic telecommunications cable, co-owned
by TELUS Communications Co. ("Telus") and
Hydro-Québec, and also used by Bell Canada. Later that year,
M. Vallée visited a local museum in located in a former
church, where he had occasion to look at an old map or chart. It
showed a line running through the area where he fished for crab.
Beside the line, the word "abandoned"
["abandonné"] was handwritten. M. Vallée
assumed that the line on the chart was the same cable he had
snagged. As the trial judge put it,

[w]ithout giving [the matter] a second thought, [Mr.
Vallée] concluded that this was what he was hooking with his
anchor. He only glanced at it for a matter of seconds and cannot
recall whether it was a marine chart, a topographical chart, or
indeed what type of map it was at all.2

In 2006, M. Vallée snagged the cable again. This time,
however, he cut the cable with an electric saw and buoyed one end
of the cable. A few days later, while in the same area, his anchor
caught the cable for a third time. He cut the cable again.

The Trial

Of course, the cable was not "abandoned" at all.
Telus, Hydro-Québec and Bell Canada sued M. Vallée,
his company and his fishing vessel to recover the costs of
repairing the cable. At trial in the Federal Court, it was
established that M. Vallée knew that he was cutting a
submarine cable at the time he cut it. It was also found, from his
reliance on the museum chart, that he had adverted to the
possibility that the cable could be in use, or, that it could also
be abandoned. M. Vallée testified that he was aware that it
was possible to "transmit electricity by means of a submarine
cable" – thus, the lower court found that M.
Vallée had actual knowledge of the risk that he could be
cutting a "live" cable. Nevertheless, the lower court
also found that M. Vallée believed that the cable was not in
use at the time he cut it.

Ultimately, Harrington J. found M. Vallée liable in
negligence for damaging the cable, because M. Vallée had
breached his common law duty to be aware of the submarine cables in
the areas in which he fished.3

In terms of damages, M. Vallée attempted to avail himself
of s. 28 (now s. 29) of the Marine Liability Act4 and
Article 4 of the Convention on limitation of liability for maritime
claims, 1976,5 which together place a damages cap of $500,000 on
marine liability for property damage caused by ships of the size
and class of the Réalice. The cap, however, is inapplicable
where a loss results from a person's intentional or reckless
conduct. The trial judge held that because M. Vallée cut the
cable on purpose, this limit did not apply.
Ultimately, M. Vallée was found liable to pay
$980,433.54.

To make matters worse for M. Vallée, the trial judge also
found that M. Vallée had lost the benefit of coverage under
his insurance policy with Royal & Sun Alliance Insurance
Company of Canada ("Royal") (the "Policy"),
because cutting the cable also fell within the wording of a
statutory exclusion from marine liability insurance for
"wilful misconduct", set out at s. 53(2) of the Marine
Insurance Act.6

The Federal Court of Appeal dismissed an appeal, and M.
Vallée was then granted leave to appeal to the Supreme Court
of Canada.

On Appeal to the SCC

The Court dealt with three main issues on appeal: (i) was M.
Vallée personally liable for the loss? (ii) could M.
Vallée avail himself of the $500,000 limit found in the
Marine Liability Act, despite Article 4 of the Convention? and
(iii) was the loss caused by M. Vallée's 'wilful
misconduct' so that it was excluded from coverage under the
Policy?

Justice Cromwell, writing for the majority,7
dismissed the first issue in short order, finding that M.
Vallée was indeed personally liable for the loss, having cut
the cable himself.

Second, Cromwell J. turned to the question whether the $500,000
limit of liability under in the Marine Liability Act would apply.
He noted that this limit does not apply if the loss "resulted
from [M. Vallée's] personal act or omission, committed
with the intent to cause such loss, or recklessly and with
knowledge that such loss would probably
result."8

After a lengthy analysis that touched on such issues as what M.
Vallée actually intended or knew when he cut the cable, and
the purpose of the Convention itself, Cromwell J. concluded that M.
Vallée had not intentionally or recklessly caused the loss
in question to the standard required by the Convention and the
Marine Liability Act, in order to deny M. Vallée the
protection afforded by the $500,000 cap. The second issue was thus
decided in M. Vallée's favour.

Cromwell J. then went on to rule against M. Vallée on the
remaining issue of whether the statutory exclusion under s. 53(2)
of the Marine Insurance Act applied. Section 53(2) provides that
"...an insurer is not liable for any loss attributable to the
wilful misconduct of the insured..."

Cromwell J. compared the standards of fault found in the Marine
Liability Act/Convention and the Marine Insurance Act, and
concluded that they were different. It was thus possible for
one's conduct to exceed the standard set out in one of the
provisions but not the other.

Justice Cromwell then discussed the meaning of "wilful
misconduct" at length, noting that the SCC had never
interpreted the phrase "wilful misconduct" in the context
of a marine insurance exclusion. Referring to several old
precedents dealing with "wilful misconduct" in the
context of, among other things, the "gratuitous
passenger" doctrine, he stated at para. 61:

...these statements accurately, although not necessarily
exhaustively, describe types of conduct that fall within that
description for the purposes of the exclusion of liability under
the Marine Insurance Act. In short, wilful misconduct includes not
only intentional wrongdoing but also other misconduct committed
with reckless indifference in the face of a duty to know. [Emphasis
added.]

Cromwell J. went on to hold that M. Vallée's actions
in the circumstances were "so far outside the range of
conduct" to be expected of him in the circumstances as to
constitute misconduct. He held, at paragraphs 65 - 67:

...Mr. Vallée knew that what he was cutting was a
submarine cable. [...] His reliance on the map, of unknown date or
authenticity, which was not a marine chart and which he saw for
only a few seconds, coupled with his duty to be aware of hazards to
navigation and his failure to have up-to-date charts or make
inquiries by radio from his vessel, amply bear out the trial
judge's conclusion that Mr. Vallée's conduct was
"reckless in the extreme": para. 84. [...] He thus
committed an act of wilful misconduct: he ran an unreasonable risk
with subjective knowledge of that risk and indifference as to the
consequences.

The fact that Mr. Vallée, as the trial judge found,
believed that the cable was not in use is beside the point. To hold
otherwise is to conflate recklessness with intention. People like
Mr. Vallée who take unreasonable risks of which they are
subjectively aware often wrongly believe that the risk which they
decide to take will not result in harm. That is the essence of
recklessness.

While the threshold to break liability under the Convention
requires intention or recklessness with knowledge that the loss
will probably occur, wilful misconduct under the Marine Insurance
Act does not require

either intention to cause the loss or subjective knowledge that
the loss will probably occur. It requires, in the context of this
case, simply misconduct with reckless indifference to the known
risk despite a duty to know. The trial judge's reasons, read in
light of the record, show that at the time he cut the cable Mr.
Vallée, who had a duty to know better, subjectively adverted
to the risk that the cable might be live and decided to cut it
anyway on the sole basis of some handwriting that he had seen for a
few seconds

on a map on a museum wall — a map which was not a marine
chart and was of unknown origin or authen ticity. Cutting the cable
in those circumstances constitutes wilful misconduct as that term
is defined in all of the authorities to which I have referred.

In a strong dissent, Wagner J. agreed with the majority's
presentation of the facts, but considered one particular finding of
fact to be determinative: that M. Vallée sincerely believed
the cable was not in use at the time that he cut it, and,
consequently, could not have knowledge of the loss that would
result.

Wagner J.'s view was that to hold, as the majority did, that
"conduct exhibiting reckless indifference in the face of a
duty to know" represents "willful misconduct", is to
disregard the question of whether the person who committed the act
had knowledge, at the very moment the act was committed, of the
harmful consequences associated with it. Proving that certain
conduct exhibits "reckless indifference" is the first
step only; it must then be proven that this conduct was wilful.
Wagner J. adopted the comment by Peter Cane in "Mens Rea and
Tort Law",9 where he wrote (at page 538) that
"recklessness necessarily implies subjective knowledge of the
consequences of the act". Justice Wagner would have allowed
the appeal in its entirety.

Notably, the majority's reasons do not discuss principles of
policy interpretation. For example, there is no explanation why the
Court would not consider and apply the plain and ordinary meaning
of "wilful", and also why it would not apply the doctrine
that requires exclusions to be read narrowly. Black's Law
Dictionary, for example, defines "wilful" as follows:

A voluntary act becomes willful in law only when it involves
conscious wrong or evil purpose on the part of the actor or at
least inexcusable carelessness whether the act is right or wrong.
The term willful is stronger than involuntary or intentional and is
traditionally the equivalent of malicious, evil or
corrupt.10

In other areas of insurance, policy exclusions aimed at
excluding "intentional acts" may or may not contain the
word "wilful". However, the concept behind those
exclusions and the exclusion at issue in this case is the same:
where an insured acts with the intention of causing the harm
otherwise insured, the exclusion applies. Where an insured is
negligent, (i.e. falls below the standard of care in the face of
reasonably foreseeable consequences), coverage is provided by the
policy.

Some may argue that Peracomo has unwittingly broadened the scope
of the intentional act exclusions, since the Court has found that
the term "wilful misconduct" does not require proof of
intent. The decision carries with it potentially far-reaching and
unintended consequences with respect to the interpretation of
certain exclusions, as insurers may attempt to rely on the
Court's analysis in Peracomo to assert a broader scope for
their own policy exclusions. Only time will tell whether this
proves to be the case, or whether the majority's analysis will
remain limited to the statutory exclusions in marine insurance.

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